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Title: |
The Ratchet Effect and Uninducibility under Ex
Ante Symmetric Information |
| Author: |
Bae, Hyung |
| Author
Affiliation: |
Dongguk U |
| Source: |
International Economic Journal, Summer 1993, v. 7, no. 2, pp. 51-59 |
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Publication Date: |
Summer 1993 |
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Abstract: |
This paper shows that the ratchet effect
can occur in incentive contracts with ex ante symmetric information, in
a two period principal-agent model in which the agent's productivity is
unknown to the principal and the agent at the time when the first-period
contract is signed. When the first period output is realized, the agent
becomes more informed than the principal because the agent's effort is
not observable to the principal. Thus, if commitment cannot be made, the
agent has an incentive to underproduce in the first period in order to
induce a less demanding contract in the second period. We find that the
agent's incentive to underproduce leads to the uninducibility of any
effort level of the agent in the first period. |
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